Valuethinker wrote: . . . The assets of a US mutual fund are held by a separate custodian. If the manager (Vanguard) fails, then the assets are clearly and separately segregated. That's been tested again and again in various scenarios with asset managers getting into financial distress and even bankruptcy.

Risk at Vanguard is probably as small as it can get, but it would be naive to think it does not exist. Every few years we learn of investors losing money due to management company fraud. MF Global is a recent one. Madoff, Vesco.... And let's not foget the 'late trading' scandal of 2003 that caught Janus, Putnam and others. The list goes on.

As we learned from the most recent banking-subprime loan scandal, and the savings and loan scandal in the late 80's, auditors often provide little security for shareholders.

stemikger wrote:Thank you Taylor. For someone who is not a fan of International, can they do this with just two funds or possibly one? I remember reading in Common Sense on Mutual Funds, Mr. Bogle saying a simple balanced index fund can do the trick for most investors.

Cheers and Happy New Year to you and Pat.

Steve G.

Hi Steve:

If you do not want international in your asset allocation, it is very acceptable two use only two funds: Total Stock Market and Total Bond Market. This is what Mr. Bogle wrote in The Little Book of Common Sense Investing:

"

Deep down, I remain absolutely confident that the vast majority of American families will be well served by owning their equity holding in an all-U.S. stock-market index portfolio and holding their bonds in an all-U.S. bond-market index portfolio."

MinimalZen wrote:I am completely sold on indexing. How ever I wonder what would have been the 1-year, 3-year and 5-year return on the Three Fund Portfolio? Where can I find that info or how could I compute that info?

MinimalZen wrote:I am completely sold on indexing. How ever I wonder what would have been the 1-year, 3-year and 5-year return on the Three Fund Portfolio? Where can I find that info or how could I compute that info?

Thanks!

Hi MinimalZen:

Before giving you past returns we need to understand three things:

1. There is no standard "3-fund portfolio." Each investor selects their desired asset-allocation between domestic stocks, international stocks, and bonds--then allocates the 3-funds accordingly.

2. When comparing funds, it only makes sense (if any) to compare category returns over long periods. For example, comparing a large-cap growth fund with a small-cap value or bond fund is meaningless.

3. Past performance does not predict future performance.

Below is the annualized return of each fund in the 3-Fund Portfolio (12-31-2011):

Taylor Larimore wrote:1. There is no standard "3-fund portfolio." Each investor selects their desired asset-allocation between domestic stocks, international stocks, and bonds--then allocates the 3-funds accordingly.

Thank you Taylor for your explanation. My question is more mathematical than speculative.How could one go about calculating the returns on an investment of say $1000 invested every January for the past 5 years in an AA of 40% in VTSMX, 20% in VGTSX and 40% in VBMFX? Is there a way to make up an Excel sheet for the same?

Taylor Larimore wrote:1. There is no standard "3-fund portfolio." Each investor selects their desired asset-allocation between domestic stocks, international stocks, and bonds--then allocates the 3-funds accordingly.

Thank you Taylor for your explanation. My question is more mathematical than speculative.How could one go about calculating the returns on an investment of say $1000 invested every January for the past 5 years in an AA of 40% in VTSMX, 20% in VGTSX and 40% in VBMFX? Is there a way to make up an Excel sheet for the same?

You would need to include a feature on if, how and when you rebalance. The results would depend on that.

Do you have any comment on the risk / beta / volatility of the Three Fund Portfolio or its components?

We know that the more diversification in a fund, the lower the risk from the failure of companies in the fund. Broad market index funds hold ALL the companies in their index. The result is lower risk.

Total market index funds in the 3-fund portfolio are on the "Efficient Frontier"--No alternate portfolio provides less risk with the same expected return. I gave a link to John Norstad's "proofs" in an earlier Reply.

Getting around to my final AA this week after moving almost everything into VG and have read thru this thread and so other pointed to with interest.

So, sorry for what might seem so simple a question for you experienced Bogleheads but a 3 fund reads to me as 33/33/33 using Total Stock, Total Bond and Total Intl with no consideration for age or closeness to retirement. But everything I have read says that bonds % should be your age using either 100-age or 120-age calc, in my case I'm 60 and heading to 50/50 for equites and fixed. I'm mostly there w/ a very small smattering of REIT (1%) and TIPS (1%) both in taxable. So in a 3 fund how do Total Stock, Total Bond and Total Intl allocate out for a 60 year old, 6 years from retirement?

sidekick wrote:Getting around to my final AA this week after moving almost everything into VG and have read thru this thread and so other pointed to with interest.

So, sorry for what might seem so simple a question for you experienced Bogleheads but a 3 fund reads to me as 33/33/33 using Total Stock, Total Bond and Total Intl with no consideration for age or closeness to retirement. But everything I have read says that bonds % should be your age using either 100-age or 120-age calc, in my case I'm 60 and heading to 50/50 for equites and fixed. I'm mostly there w/ a very small smattering of REIT (1%) and TIPS (1%) both in taxable. So in a 3 fund how do Total Stock, Total Bond and Total Intl allocate out for a 60 year old, 6 years from retirement?

Your ratio of the three funds should be determined by your specific circumstances and preferences. There is no assumption that it will be 33/33/33.

For example if a 50/50 allocation is appropriate for you it could be 35/15/50 (TSM/TISM/TBM). Of course there are many other possible combinations of the first two numbers depending upon the exposure to international stocks you desire.

Last edited by FrugalInvestor on Sun Jan 08, 2012 11:04 pm, edited 1 time in total.

A 3 fund reads to me as 33/33/33 using Total Stock, Total Bond and Total Intl with no consideration for age or closeness to retirement.

No, no, no. The 3-fund portfolio simply means that the portfolio uses only 3 funds. The percentage of each fund is entirely up to the owner and will depend on his or her desired asset allocation plan (domestic stocks; international stocks and bonds).

sidekick wrote:Getting around to my final AA this week after moving almost everything into VG and have read thru this thread and so other pointed to with interest.

So, sorry for what might seem so simple a question for you experienced Bogleheads but a 3 fund reads to me as 33/33/33 using Total Stock, Total Bond and Total Intl with no consideration for age or closeness to retirement. But everything I have read says that bonds % should be your age using either 100-age or 120-age calc, in my case I'm 60 and heading to 50/50 for equites and fixed. I'm mostly there w/ a very small smattering of REIT (1%) and TIPS (1%) both in taxable. So in a 3 fund how do Total Stock, Total Bond and Total Intl allocate out for a 60 year old, 6 years from retirement?

To each, his own. And, no, the 3 fund portfolio does not prescribe a recommended allocation among the funds.

That said, I have decided to go with 35% Total Market, 25% Total International and 40% Total Bond. I have decided not to tinker with it by adding REIT, TIPS or natural resources. I am 61, retired with a part time job, as is my wife. I have a pension (she does not), and we have enough cash flow that we have not had to tap savings these past two years since my retirement.

My own feeling is that age in bonds is too conservative. Also, I am probably more biased (in my thinking) to global than most people.

The real question, I suppose, is to look at your own glide path to retirement. How are you doing?

1. If you're about there, and are good with that, you may want to be more conservative. Take money off the table.

2. If you're not there, you must save more, take more risk, and / or lower your expectations.

3. If you're comfortably done, perversely, you can take more risk. That's where I am. If the market tanks 40% this year, I can take it. Been there twice in the last decade. (Actually, I am now much better insulated against a crash than I was then. Lessons were learned!)

But, all in all, I'd recommend 40% or more in bonds. And, this is hand grenades, not sniping. Plus minus 5% in either of the three allocations makes little difference.

Assume a 3.5% annual withdrawal from your nest egg after you retire. Is that enough? If so, you're golden. If not, and your required withdrawal rate is above 4.0%, you have some choices to make.

By the way, the Social Security decision is also (I think) quite easy. What are your cash flow needs? The crossover point for SS is about age 80. If you plan to live beyond age 80, delay taking benefits until age 70. If you plan to live less than age 80, take them at age 62. (This omits any complications from disability, multiple spouses, ...)

umfundi wrote:My own feeling is that age in bonds is too conservative. Also, I am probably more biased (in my thinking) to global than most people.

The real question, I suppose, is to look at your own glide path to retirement. How are you doing?

1. If you're about there, and are good with that, you may want to be more conservative. Take money off the table.

2. If you're not there, you must save more, take more risk, and / or lower your expectations.

3. If you're comfortably done, perversely, you can take more risk. That's where I am. If the market tanks 40% this year, I can take it. Been there twice in the last decade. (Actually, I am now much better insulated against a crash than I was then. Lessons were learned!)

But, all in all, I'd recommend 40% or more in bonds. And, this is hand grenades, not sniping. Plus minus 5% in either of the three allocations makes little difference.

Assume a 3.5% annual withdrawal from your nest egg after you retire. Is that enough? If so, you're golden. If not, and your required withdrawal rate is above 4.0%, you have some choices to make.

By the way, the Social Security decision is also (I think) quite easy. What are your cash flow needs? The crossover point for SS is about age 80. If you plan to live beyond age 80, delay taking benefits until age 70. If you plan to live less than age 80, take them at age 62. (This omits any complications from disability, multiple spouses, ...)

Best wishes,

Keith

Thanks to all for clarifying what I believed was correct. Just reading to many things and needed to clear the clutter.

Thanks to Keith as I agree with his points on bonds vs. age and global. My nest egg is sufficient enough at this point along w/ other pension dollars, working for 5 or more years and SS around 66 or later to allow for 4% withdrawal rate.

Total International? Doesn't the FTSE outperform this, as well as including otherwise-missing Canada?...

These may be mere tweaks.

Thanks,Rob E

Vanguard, to its credit, has now added Canada to Total International. So Total International is now more diversified than FTSE (due to including small caps). Not a whole lot of difference between the two.

sidekick wrote:Thanks to all for clarifying what I believed was correct. Just reading to many things and needed to clear the clutter.

Thanks to Keith as I agree with his points on bonds vs. age and global. My nest egg is sufficient enough at this point along w/ other pension dollars, working for 5 or more years and SS around 66 or later to allow for 4% withdrawal rate.

Everything I said are approximations and rules of thumb. Check your own numbers!

For example, I went to the Social Security calculator and started with benefits at my "normal" retirement age. Then I went to age 62, age 70, etc. When I came back to the first age, the numbers were different than the first time around. I believe there are assumptions in there (like future earnings) that are not fully visible.

Isn't the decision to hold fixed income in tax preferred space somewhat more debateable given today's low yield environment especially if you have opted to tilt your fixed income to shorter duration. After all Vanguard Short Term Bond's Yield to Maturity is 0.99%.

Personally if I had taxable investments I might opt to keep the short term bond and pay the tax on the low yield and keep my equity investments tax sheltered. As they have a higher potential total return.

This was the suggestion I made to my parents who are retired, but not yet withdrawing from their tax preferred space. They are holding their cash and short term bonds in taxable and in their tax deferred they hold both fixed income and equities.

Rick_J- wrote:Isn't the decision to hold fixed income in tax preferred space somewhat more debateable given today's low yield environment especially if you have opted to tilt your fixed income to shorter duration. After all Vanguard Short Term Bond's Yield to Maturity is 0.99%.

Personally if I had taxable investments I might opt to keep the short term bond and pay the tax on the low yield and keep my equity investments tax sheltered. As they have a higher potential total return.

This was the suggestion I made to my parents who are retired, but not yet withdrawing from their tax preferred space. They are holding their cash and short term bonds in taxable and in their tax deferred they hold both fixed income and equities.

Does that make sense ?

I suppose it might IF you believe that things will stay as they are going forward.

Rick_J- wrote:Isn't the decision to hold fixed income in tax preferred space somewhat more debateable given today's low yield environment especially if you have opted to tilt your fixed income to shorter duration. After all Vanguard Short Term Bond's Yield to Maturity is 0.99%.

Personally if I had taxable investments I might opt to keep the short term bond and pay the tax on the low yield and keep my equity investments tax sheltered. As they have a higher potential total return.

This was the suggestion I made to my parents who are retired, but not yet withdrawing from their tax preferred space. They are holding their cash and short term bonds in taxable and in their tax deferred they hold both fixed income and equities.

Does that make sense ?

Hi Rick:

I went to the Vanguard website and compared the before and after 10-year returns of Total Stock Market and Total Bond Market recommended in the 3-fund portfolio:

Thanks for your reply Taylor. I have great respect for your opinion and enjoy reading your posts and book.

That said I am sure you agree that past tax adjusted performance is no guarantee of future tax adjusted performance and the last decade was great for bonds and mediocore for stocks.

I certainly do not know what the future will bring, but if we consider the long term future expected returns estimated by Mr. Bogel at the last Bogelheads reunion isn't the decision on asset location more of a coin toss given the current yield environment.

Rick_J- I think a time when you might keep some cash or short term bonds in taxable (when interest rates are low) is when you will need to spend the money in the short term. If you had it in stocks you may be forced to sell and realize a taxable gain.

Rick_J- wrote:I certainly do not know what the future will bring, but if we consider the long term future expected returns estimated by Mr. Bogel at the last Bogelheads reunion isn't the decision on asset location more of a coin toss given the current yield environment.

Rick

Hi Rick:

The primary reason nearly every authority recommends locating tax-efficient stocks in taxable accounts and bonds in tax-deferred accounts is because most return in stocks is tax-deferred and at capital-gain tax rates, but most return in bonds is paid out each year at income-tax rates.

The current low yield may be an exception. Check the before- and after tax-returns at Vanguard for a shorter period than the 10-year period I selected. Note that by holding stocks in taxable during the period shown, the investor increased after-tax return by more than 1%.

For me, the real issue here is to approximate Target Retirement Income (or something similar with perhaps 35-40% equity) with a taxable account. There are no state specific tax exempt funds that would apply to my case.

Any tax exempt bond fund substitutions will not be as diversified as Total Bond, but perhaps a blend of Intermediate and High Yield Tax exempt would be best? The biggest downside for me would be the loss of automatic re-balancing that Target Retirement Income offers.

I raised this question with Taylor by PM several days ago, and he felt that forum input would be valuable in answering this question. Obviously, my situation is much in the minority here, so should I ask by way of a new thread?

Rick_J- wrote:I certainly do not know what the future will bring, but if we consider the long term future expected returns estimated by Mr. Bogel at the last Bogelheads reunion isn't the decision on asset location more of a coin toss given the current yield environment.

Rick

Hi Rick:

The primary reason nearly every authority recommends locating tax-efficient stocks in taxable accounts and bonds in tax-deferred accounts is because most return in stocks is tax-deferred and at capital-gain tax rates, but most return in bonds is paid out each year at income-tax rates.

The current low yield may be an exception. Check the before- and after tax-returns at Vanguard for a shorter period than the 10-year period I selected. Note that by holding stocks in taxable during the period shown, the investor increased after-tax return by more than 1%.

I am a newbie here & am not a real experienced investor. I would like to transfer some funds from a managed Fidelity account over to Vanguard. I understand the concept of having a simple portfolio of 2 or 3 low cost funds.

Since the interest rate is low & can only go up, that usually means that bonds will go down. Am I being overly concerned about having 50% total bond market (VBTLX) in a portfolio along with 50% total stock market (VTSAX)? Does it make any sense using TIPS to replace some or all of the bond fund?

Reading up on some simple portfolios I saw that the Scott Burns Coach Potato portfolio previously used a 50% total bond market index fund but changed to TIPS when they became available.

I’m not trying to challenge anyone because I’m pretty clueless about this. I would just like to gain some knowledge before I move funds to Vanguard.

As for TIPS vs. Total Bonds, that's up to you. I model my portfolio after the Vanguard Target Retirement fund models (Total Stock / International / Total Bonds / TIPS), with the TIPS split nearly equally with Total Bonds. However, my risk tolerance may be lower than yours, which is why increased TIPS.

starboard wrote:My question is how best to implement the three fund portfolio when all investment is in taxable accounts? In my case (retired with no earned income), a tax sheltered account is not going to happen.

Hi Starboard:

Assuming you have taxable income, and based on the information you provided, I would probably use any low-cost, good quality, diversified, tax-exempt bond fund like Vanguard's Short-Term or Intermediate-Term Tax-Exempt bond funds. TIPS are generally unsuitable for a taxable account.

starboard wrote:My question is how best to implement the three fund portfolio when all investment is in taxable accounts? In my case (retired with no earned income), a tax sheltered account is not going to happen.

For me, the real issue here is to approximate Target Retirement Income (or something similar with perhaps 35-40% equity) with a taxable account. There are no state specific tax exempt funds that would apply to my case.

Any tax exempt bond fund substitutions will not be as diversified as Total Bond, but perhaps a blend of Intermediate and High Yield Tax exempt would be best? The biggest downside for me would be the loss of automatic re-balancing that Target Retirement Income offers.

I raised this question with Taylor by PM several days ago, and he felt that forum input would be valuable in answering this question. Obviously, my situation is much in the minority here, so should I ask by way of a new thread?

stb

It turns out that right now the yield premium for taxable bonds vs. tax exempt bonds is extremely small. The difference in yields between taxable and tax-exempt bonds of the same credit quality and duration is referred to in the financial literature as the "implied tax cost".

So, your penalty for owning the TE funds vs. TBM is less than 0.1% for comparable term risk. Credit risk is harder to compare between the two, since TBM has a large proportion of Treasuries (safer than munis) but also some corporates (quite a bit riskier than munis). So TBM has more dispersion in the credit risk of the bonds it holds, which means that just comparing the average credit quality doesn't tell the complete story. But neither portfolio is drastically more risky than the other.

In fact, an investor with both taxable and tax-advantaged accounts would wind up ahead by owning IT TE in taxable and TSM in tax-advantaged, rather than TSM in taxable and TBM in tax advantaged. At the current yields, the "tax cost" of owning IT TE in taxable (i.e. the lower yield relative to TBM) is only 0.09%, while the tax cost of TSM in taxable will almost certainly be higher than that (it's 0.78% in the 10 year historical returns that Taylor quotes above).

(munis were an even better buy a year ago due to Meredith Whitney scaring everybody)

Another option is Vanguard's tax-managed balanced fund (tax-managed stocks + tax exempt bonds). But the ratio between the two is fixed, and so it wouldn't quite work as a target date type of fund.

After reading another post on how well Wellesley (VWIAX( did last year versus a 40/60 Three fund approach it made me start thinking about what advantages there might be to add that as part of the mix. Is there any mileage in doing something like this? I just wonder if it adds the ability to compensate for a weaker three fund performance. I know this was just last year but I wonder if anyone has looked at it further out than that. Where would I go to get the data on say the last 15 years of a 40/60 Three fund approach vs. VWIAX? Any thoughts as to whether that is even a worthwhile endeavor?

Adding Wellesley would result in 100% overlap of the Target Fund portfolio and make it difficult to know your asset-allocation--plus screw-up the Target Fund's glide path. Don't do it.

As for TIPS vs. Total Bonds, that's up to you. I model my portfolio after the Vanguard Target Retirement fund models (Total Stock / International / Total Bonds / TIPS), with the TIPS split nearly equally with Total Bonds. However, my risk tolerance may be lower than yours, which is why increased TIPS.

Previously I tried some basic investing with Vanguard in 2008 when I retired. My investments were going downhill so I thought I should get help & ended up at Fidelity with a managed portfolio. Looking back perhaps my earlier attempts with Vanguard might have been OK. After all, most people’s investments did not do well that year.

Currently I’m paying Fidelity & I lost money in 2011. The S&P did not lose money. The Scott Burns Couch Potato did not lose money. Obviously I’m not happy about paying for help & still losing money. I don’t want to jump around but I can reduce my costs by trying Vanguard again with a simple or lazy portfolio.

But as mentioned I am concerned about getting a total bond market index fund. In fact yesterday I was reading a new Money magazine & their 2012 investment section mentioned bonds could lose money if the interest rate goes up.

Since I’m retired I want to be conservative. But if bonds can go down in the very near future and the stock market is volatile, where does one go for safety? I don’t expect to gain a lot by being conservative, but I would hope not to lose either.

What, if any, is the downside of using a TIPS fund versus a bond fund?

Rick_J- wrote:Isn't the decision to hold fixed income in tax preferred space somewhat more debateable given today's low yield environment especially if you have opted to tilt your fixed income to shorter duration. After all Vanguard Short Term Bond's Yield to Maturity is 0.99%.

Personally if I had taxable investments I might opt to keep the short term bond and pay the tax on the low yield and keep my equity investments tax sheltered. As they have a higher potential total return.

This was the suggestion I made to my parents who are retired, but not yet withdrawing from their tax preferred space. They are holding their cash and short term bonds in taxable and in their tax deferred they hold both fixed income and equities.

Does that make sense ?

Rick, to me it makes eminent sense and I am doing just that with variations. I have put my fixed income in tax exempt funds in the taxable accounts and am using the US total stock market index in deferred accounts. That is opposite of conventional wisdom but I htink the world has changed and will change a lot,k lot more come next year.

Rick_J- wrote:I certainly do not know what the future will bring, but if we consider the long term future expected returns estimated by Mr. Bogel at the last Bogelheads reunion isn't the decision on asset location more of a coin toss given the current yield environment.

Rick

Hi Rick:

The primary reason nearly every authority recommends locating tax-efficient stocks in taxable accounts and bonds in tax-deferred accounts is because most return in stocks is tax-deferred and at capital-gain tax rates, but most return in bonds is paid out each year at income-tax rates.

The current low yield may be an exception. Check the before- and after tax-returns at Vanguard for a shorter period than the 10-year period I selected. Note that by holding stocks in taxable during the period shown, the investor increased after-tax return by more than 1%.

Not next year, when there is no qualified dividend rate. Remember such a thing never ever existed until the Bush tax cuts. There had been cap gains preference but never dividends. --political comment deleted--

Puzzled wrote:Since I’m retired I want to be conservative. But if bonds can go down in the very near future and the stock market is volatile, where does one go for safety? I don’t expect to gain a lot by being conservative, but I would hope not to lose either.

What, if any, is the downside of using a TIPS fund versus a bond fund?

You can find information in: TIPS vs Total Bond Market?. The downside would be underperformance of TIPS when inflation is low (see #Cruncher's post), but I'll defer to the experts for advice on your situation.

To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

starboard wrote:My question is how best to implement the three fund portfolio when all investment is in taxable accounts? In my case (retired with no earned income), a tax sheltered account is not going to happen.

LadyGeek:Thanks for the link to tfb's detailed bond fund yield calculator from the wiki. I had not seen that one yet.

baw703916: Thanks for the comparison between Int Term Tax Exempt and Total Bond (TBM). I am looking for something like the Target Income, which as a fixed stock/bond ratio, so Vanguard's Tax Managed Balanced might be a good idea. It has about a 50/50 ratio, so I would also want to use something like Intermediate-Term Tax-Exempt to pull the bond side up 10 or 15%, to something more like 40/60 or 35/65.

I also wondered about using Target Retirement 2050, which has a 90/10 ratio, and would auto-re-balance the Total Stock Market and International Total Stock Market pieces, while only leaving a small TBM portion. This fund holds this ratio for at least 15 years (as long as managers don't change the current strategy). Again, I would add something like Intermediate-Term Tax-Exempt to pull the bond side up to the neighborhood of 60 to 65%. It looks like the residual TBM might be only 4% overall in this scenario.

This leaves me with some options to consider, as well as how to cope with long term cap gains in order to reconfigure the portfolio. I'd like to get things into more of a set and forget, stay-the-course mode soon.

Puzzled wrote:I don’t want to jump around but I can reduce my costs by trying Vanguard again with a simple or lazy portfolio.

Since I’m retired I want to be conservative. But if bonds can go down in the very near future and the stock market is volatile, where does one go for safety? I don’t expect to gain a lot by being conservative, but I would hope not to lose either.

I recommend going "simple" and never jump around again.

I'm retired, lived largely on my investments for 10 years, now live on them and SS. Last year I finally abandoned my self-picked 18-index fund portfolio, and went with the simpler Coffeehouse Portfolio. I expect to eventually be in a 3 or 4 fund portfolio.

I don't worry about bonds going down since I can't predict where interest rates or bond values will be in 20 years when I might actually have to sell some of those funds for expenses. Until then, higher interest rates would be a great benefit to my current investment income.

Understanding that Cash should not be included in the AA for the Three Fund Portfolio should I not be including I-Bonds purchased for short term savings (3-5 years) in the AA? I originally included them in my bond allocation however I realized if I cash these in then it could drastically effect my 80/20 AA. I then thought I could just re-balance, however I may not be purchasing under performing assets at that time. Thoughts?

dguad4 wrote:Understanding that Cash should not be included in the AA for the Three Fund Portfolio should I not be including I-Bonds purchased for short term savings (3-5 years) in the AA? I originally included them in my bond allocation however I realized if I cash these in then it could drastically effect my 80/20 AA. I then thought I could just re-balance, however I may not be purchasing under performing assets at that time. Thoughts?

A three fund portfolio does not mess around with cash or I-Bonds.

Generally some money intended for a specific use very different from retirement and in a very short timeframe might better be left out of the portfolio calculation. Presumably if you cash in the I-Bonds, then you are either spending that cash right away or still holding the cash for that short term plan. If you mean that the plan has changed and you aren't going to spend the money, then your AA is out of whack, as can happen when circumstances change. The purpose of rebalancing is to keep the AA to the targets you have planned. It has nothing to do with purchasing underperforming assets. If you suddenly have too much cash, then put that asset into your plan where it belongs. If you don't, then your plan doesn't mean anything. Of course, the changed circumstances could also lead you to change your plan. That is ok. It is unlikely, however, that the new plan is to just hold big chunks of cash forever.

dguad4 wrote:Understanding that Cash should not be included in the AA for the Three Fund Portfolio should I not be including I-Bonds purchased for short term savings (3-5 years) in the AA? I originally included them in my bond allocation however I realized if I cash these in then it could drastically effect my 80/20 AA. I then thought I could just re-balance, however I may not be purchasing under performing assets at that time. Thoughts?

Cash (or any other asset) CAN be included in the Three Fund Portfolio.

The 3-Fund Portfolio is a very efficient and diversified portfolio by itself. It is easily adaptable to additional securities but portfolio maintenance will be increased and its simplicity diminished.